Irish Unity Makes Economic Sense

First-Ever Economic Modeling Details Economic Benefits Of Irish Unification 

Study by researchers who have examined German and Korean unification models shows long-term improvement of GDP per capita in the North of 4 to 7.5 percent, while the Republic would see a boost of 0.7 to 1.2 percent.

At an evening presentation at the Harvard Club in Midtown Manhattan, two prominent scholars in the field of political science and economics released the findings of a landmark, first-ever economic study entitled Modeling Irish Unification, which showed significant long-term improvement in the stagnant Northern Irish economy would result from removing currency, trade and tax barriers that currently impede economic growth.

The report also showed improvements for theRepublic of Ireland, which would benefit from barrier-free access to the Northern Irish market. By modeling three separate unification scenarios, the researchers showed a long-term improvement of GDP per capita in the North of 4 to 7.5 percent, while the Republic of Irelandwould see a boost of 0.7 to 1.2 percent.

The report presents the first comprehensive economic models simulating the political and economic integration of Northern Ireland and the Republic of Ireland. The study is particularly timely given current debates over Irish economic growth and the U.K.'s continued participation in the European Union. Three unification scenarios were presented, with the most aggressive estimating a 35.6 billion Euroboost in an all-island GDP in the first eight years of unification.

Representatives of government, the financial sector and international relations communities attended the event.

The research was led by Dr. Kurt Hubner, professor of political science, Jean Monnet Chair for European Integration and Global Political Economy and Director of the Institute for European Studies at the University of British Columbia. Dr. Hubner directed the research through his firm KLC – Consulting for Tomorrow, an economic and political relations consulting firm based in Vancouver. The economic model was developed by Dr. Renger Herman van Nieuwkoop, Director and Founder of ModelWorks and professor of economics at ETH Zurich.

"Our modeling exercise points to strong positive unification effects driven by successful currency devaluation and a policy dependent industrial turn-around," said Dr. Hubner. "While these effects occur in a static global economic environment, under ideal political conditions, they underline the potential of political and economic unification when it is supported by smart economic policy."

In the executive summary, Professor Steven Raphael, UC Berkeley, wrote: "Political and economic unification of the North and South would likely result in a sizable boost in economic output and incomes in the North and a smaller boost in the [Republic of Ireland]."

Marcus Noland, Executive Vice President and Director of Studies at the Peterson Institute for International Economics, provided comment on the study, writing: "Modeling Irish Unification is an important, timely examination of the economics of Irish unification, applying state-of-the-art modeling techniques to the issue at hand. The modeling work illustrates a variety of channels which are likely to be at play in the Irish case, and concludes that Irish unification would be economically beneficial to both parts of the island, especially for smaller, poorer,Northern Ireland."

After Dr. Hubner and Dr. van Nieuwkoop'sconcluded their remarks, Michael Burke, economic consultant and former Senior International Economist at Citibank in London, discussed the global impact of a unifiedIreland.

"The issue of the benefits of a unified Irish economy are unfortunately largely overlooked," said Burke. "This paper goes some way to correcting that and will help develop discussion in this neglected area."

The study was commissioned by K.R.B., a San Francisco Bay area–based nonprofit social welfare organization that promotes social welfare and conflict resolution through education.

Northern Ireland Net Fiscal Balance Report 2011-2012

In any debate on the economics of a United Ireland, Unionists will inevitably contend that the North receives an annual £10bn subvention from Westminster. Their argument is that in a United Ireland the Dublin government would not be able to afford to replace this block grant. Therefore it does not make economic sense to have a United Ireland.

In order to challenge this argument we need to go directly to the source of the argument. In March 2014 the Department of Finance and Learning (DFL) published the Northern Ireland Net Fiscal Balance Report 2011-2012. 

 At first glance the Unionist argument appears to be correct, that Northern Ireland generates around £14 billion in tax revenue and spends approximately £24 billion leaving a deficit of some £10 billion

2011-2012	£'billion
Estimated Total Revenue	14.1
Total Managed Expenditure	23.8
Surplus/(Deficit)	-9.7

Let us delve into the figures. We are told the estimated tax revenue is c£14.1 billion. A breakdown of the relevant taxes is given, but we are not told how much corporation tax which is generated in Northern Ireland but declared in London. This is true for companies which are located in the North with their headquarters in London.

On the expenditure side, what makes up the 'Total Managed Expenditure' figure of £23.8 billion? Total Managed Expenditure is made up of 'Identifiable Managed Expenditure', 'Non Identifiable Managed Expenditure' and 'Accounting Adjustments'. Non Identifiable Managed Expenditure of £3.3 billion relates to UK wide spending on things like Defence and servicing of debt. Basically it has nothing whatsoever to do with the North of Ireland. I'm not sure exactly what the Accounting Adjustment of £1.1 billion relates to but I do know it relates to an overall UK accounting adjustment. Again nothing to do with the North. Total Managed Expenditure £'billion Identifiable Managed Expenditure 19.4 Non Identifiable Managed Expenditure 3.3 Accounting Adjustments 1.1 Total Managed Expenditure 23.8 So that just leaves us with the 'Identifiable Managed Expenditure' of £19.4 billion. We are told it is made up of Departmental Expenditure Limits (DEL), Annual Managed Expenditure (AME) and Locally Generated Funds. Locally Generated Funds? Yes, you guessed it. These are funds collected in the North, mainly from regional and local rates. Therefore these funds are not British government funding. I am not aware of the how much of Identifiable Managed Expenditure is made up of these 'Locally Generated Funds' in 2011-2012 but I do have the figures for 2012-2013. Until I find out the figure for 2011-2012 I will take it that it is the same as the £1.3 billion figure of 2012-2013. Identifiable Managed Expenditure 2012-2013 £'billion Departmental Expenditure Limits (DEL) 10.4 Annual Managed Expenditure (AME) 8.1 Locally generated funds (mainly Regional and Local Rates) 1.3 NI Identifiable public expenditure 19.8     With the benefit of now knowing the breakdown of the figures we can conclude that the total relevant expenditure in the British government financial year to April 2012 was £18.1 billion and the real budget deficit and block grant was £4 billion. Relevant Expenditure £'billion Total Managed Expenditure 23.8 Non Identifiable Managed Expenditure -3.3 Accounting Adjustments -1.1 Locally Generated Funds -1.3 Relevant Expenditure 18.1 Real Net Fiscal Balance 2011-2012 £'billion Estimated Total Revenue 14.1 Relevant Expenditure 18.1 Real Deficit -4.0 So the real figure for the FY2012 was closer to £4 billion rather than the £10 billion that is often stated by Unionists. This is before we adjust for incomplete corporation tax figures. We do not know the current (FY2015) block grant figure although I have heard several commentators say it is closer to £3 billion. Given the Tory cuts of the last three years a current subvention of £3 billion may not be too far off the mark. In the recent Irish Unity conference in Belfast, economist Michal Burke states the subvention is just £690 million. "Outlandish numbers are frequently cited for the so-called subvention from Westminster, which is not included in the resources generated in NI. But the data above shows that there are resources available in NI that make any subvention unnecessary. Recent ONS data specified the total of taxes and benefits for all households in Britain and in NI. On average households in NI receive £982 more in benefits than they contribute in taxes and charges. As there 703,000 households in NI, the total subvention to households is just £690 million. To be absolutely clear, these benefits are not welfare, but all forms of social protection,  plus the NHS, education, bus passes for the elderly, free school meals, etc., etc. (The difference between Britain and NI is households in Britain are net contributors to government finances of £152 per annum. This is accounted for by a lower proportion of the population in work and lower paid jobs in NI- a marker of successive failures of British economic policy in NI)". No matter which figure is correct, let's be clear. The only reason that the North of Ireland requires an annual subvention is because it exists as part of the United Kingdom.

Ireland's Renewable Energy

 

 

Today a Memorandum of Understanding has been singed between the Minister for Communications, Energy and Natural Resources Pat Rabbitte and his British counterpart Ed Davy. The agreement paves to way to allow Irish wind farms to export directly to Britain.

 

Speaking on RTÉ's Morning Ireland, Mr Rabbitte described the memorandum as a "win win" development.

 

This will enable Britain to buy renewable energy from Ireland helping the country to meet mandatory EU targets on renewable energy and save British consumers £7bn. As well as providing 10% of it's 2020 renewable energy target, it will mean that the British countryside will not be blighted by wind turbines.

 

So what's in it for Ireland?

 

The Irish Times states "the industry generally has been arguing that a deal will provide the trigger for billions of euro in investment with the potential to create tens, if not hundreds, of thousands of jobs". Every unemployed person costs the state in the region of €20,000 directly, through lost money in income tax and social welfare costs. So if this scheme takes 50,000 off the unemployment register, it could be worth €1bn to the state annually.

 

An EU Directive (2009) requires all EU member states to reach a 20% share of energy from renewable sources by 2020. Currently Ireland's share stands at 18%. This memorandum should comfortably bring Ireland over this target (expected to increase to 40% by 2020) and avoid paying penalties for failing to meet the target.

 

Minister Rabbitte has stated that "Ireland has the potential to generate more wind energy than its population could consume". Basic economics tells us that a surplus in supply leads to a reduction in price. Reduced energy costs of course reduce the cost of doing business.
 

While this is obviously very good news for the Irish economy, there are some areas which have not been clarified under this agreement.

 

How much of this energy will be supplied to homes and business in Ireland? The value of oil imports to Ireland is staggering. In 2010 it was estimated that Ireland imported 166,000 bbl/day, costing a whoppong US$5.3bn. In 2008 this figure was US$7.2bn. Naturally the more green energy that is supplied to Irish homes and businesses, the less reliant they are on oil. The lower the reliance on oil, the greater the savings to the Irish economy. So this begs the question, why are we exporting to Britain when the benefits of keeping green energy at home are so great?

Only the state can own electricity networks, However the private developers will effectively be establsihing their own networks by connecting their windfarms to Britain. How much will be the benefit to the state if they are to transfer ownership of the networks on commercial terms?
 

The most fundamental issue with this agreement is Ireland's share of the revenue (or lack of revenue!) generated from the wind tubines. The export of goods and services is not subject to Vat. Therefore the benefit to the exchequer from the sale of Ireland's natural resources, is dependent on tax revenues generated from profits of the energy firms.
 

However, renewable energy firms are not subject to the same taxation measures as non renewable energy companies. So instead of paying the 25% (before tax write-offs) tax rate applied to the profits a company makes from the sale of Irish oil or gas, and an additional Profit Resource Rent Tax (PRRT) of between 5% and 15%, levied on post-tax profits of licences issued after 2007, these wind energy companies are only liable to the standard corporation tax rate of 12.5%.
 

Not only should all profits made on the expolitation of Ireland's natural resources of renewable energy be taxed at the same level as natural resources of finite energy, the

government then needs to legislate to increase this 25% rate to a level that is similar to our European neighbours and remove the scope for tax write offs, loopholes and accountancy tricks which yields some of the lowest government takes in the world according to a report by Indecon Economic Consultants.

Ireland has astounding wealth in natural resources which provides a means to solve our economic problems. But this would require a fundamental change in policy.

Time for a Referendum?

This week there has again been calls for a referendum on a United Ireland. Unionist politicians such as Jeffery Donaldson a.k.a Mystic Meg tell us there is no need to call a referendum as neither the South nor the North will vote in favour. Some Nationalists tell us that we should have a referendum but now is not the right time to have it, as there remains a Unionist majority in Stormont and because of the current economic climate.

In my opinion these Nationalists are correct. Now is not the right time. I do not really think Sinn Féin want a referendum in 2013 or in the short term either. But this is not the point. They know the only way of getting a Green Paper on Irish Unity is to have a referendum called. And when it is called or agreed to, there will be alot of work to do before a date for the referendum can be set. You can't expect people to vote for something in the future if you do not know what you are voting for. How would 26 County voters have voted on the Lisbon Treaty before the terms and conditions of the treaty were set out? If around 30% (as some estimate would be the percentage in favour of a UI if a referendum was held today) were in favour before they even read the treaty, the bookies may have stopped taking bets by the time terms were published.

A series of talks should begin bewteen the Irish government, the British govenment and all parties in order to trash out the Green Paper. An agreement could take several years! So in this light Sinn Fein are correct to call for a referendum now as it needs to be set out what a United Ireland would entail - Federal arrangement?, Fiscal policy?, Health? Education?, Welfare?, Commonwealth membership? etc.

The British government will have an important role to play and they will need to be careful. If they maintain that they have no strategic interest they will agree, should the people vote for reunification, to subsidise the transition period as the North's economy is rebalanced (1 public sector job cut for every 2 private sector job created anyone?). Otherwise disidents can argue that the British purposely positioned the North as a welfare dependent economy in order that the South could not initially afford reunification.

I say initially becasue it is not yet known whether the sum of savings from synergies, removal of duplication of servies etc and the extra revenues from suitable fiscal policies, economies of scale etc that would occur in a UI are greater than the current British subvention to the North of Ireland.

And speaking of the economic argument. To those who suggest that people will not vote for a UI for economic reasons, let me ask them this. Say in a UI, the OAP of the South is to be maintained. How many Unionists (and there are alot of them over the age of 65) will vote No to having their weekly income doubled from £97.65 to €230.30 at todays rates?

Economic woes

In a week that we have learned that 11,000 private sector jobs have been lost in two years a leading economist has warned that the North's economy is facing meltdown.

Attempts to lower the North's Corporation Tax rate appear to have failed. Although we hear Finance Minister Sammy Wilson insisting that the issue will be revisited in the Autumn, the fact is, The North will not receive a special dispensastion for a reduced CT rate. The main reasons for this are that if NI were to receive a lower CT rate from the rest of the UK, there would be nothing to stop British firms based in London from moving operations to The North in order to avail of the lower CT rate. The other reason is that if NI got a lower tax rate Scotland, Wales and North East England would be screaming from the rooftops for equal treatment. With a Scottish referendum on independence in the pipeline, offering NI a lower CT rate while refusing to give it to Scotland is a high risk strategy for the Tory-Lib Dem coalition. It could be enough to swing the referendum for the 'Yes' side.

With a CT rate of 24% a deterrent to Foreign Direct Investment (FDI), the key strategy used to attact FDI to The North has been Sustainable Financial Assistance (SFA). This is basically EU funding used to offer foreign companies cash to locate to the region. This economic lever used to attract FDI to NI is due to be abolished by the EU next year. Given that SFA sounds very much like bribery this should not come as a surprise.

With the two most powerful economic levers either being phased out (SFA) or unattainable (CT), The North does not have many hands left to play. There is one hand though, a pocket of aces, if only it could be seen!

We've Struck Oil!

After decades of being told that Ireland has no natural resources, years of digging and after some 215 barron holes, in March of this year Ireland's first commercial oil well was discovered by Providence Resources off the Cork coast. Initial estimates stated that the Barryroe oil well contained between 373 and 893 million barrels of oil. However today Providence has stated that the oil field may contain up to 1.6 billion barrels of oil, four times the original estimate!

We are rich, rich I tell you, rich beyond our wildest dreams! Not quite. Given that all previous attempts to find oil off the Irish coast have been fruitless the Irish government, in an attempt to attract exploration and investment has had to set a relatively low tax levy of 25% on profits companies make from oil and gas found in Irish territories. For the same reason the state does not receive Royalties from oil and gas discoveries.

Joe.ie reports that even with the low tax levies and lack of royalties, the State could benefit to the tune of a whopping €100 billion. Others stress that significant losses on Providence's books will be written off against profits made on the Barryroe oil well hugely reducing the benefit to the Irish exchequer.

Even if the latter is correct, not all is lost. It is likely that the Government will increase the 25% tax and introduce royalties in order to benefit from further discoveries but not to an extent that will scare off future investment, exploration and drilling.

But is there more oil and gas and if so why has it not been found previously? Well it is generally accepted that the twenty fist centuary has shown enormous advancements in technology. If it is there they will find it. But is it there? David Horgan MD of Petrel Resources plc certainly think so.

"The oil world has been transformed in recent years: despite fluctuations, the oil price remains high. Ireland’s fiscal terms are competitive and legal title is secure.

"Technology has leaped ahead on several fronts, reducing costs and risks. The combination of three dimensional seismic surveys and directional drilling allow explorers to map and drain complex reservoirs.

"The planned development of the 1981 Ballyroe discovery, after a dramatic increase in reserves, shows what is now possible. We believe that the Irish offshore will be increasingly attractive to investors."

Economic argument part 1

This week the UK Treasury has dashed hopes of a cut in the Corporation Tax (CT) in Northern Ireland from the UK rate of 24% to 12.5% to match the rate of the Republic of Ireland. This of course does not come as any surpirse. There are two main reasons why the Westminster Government and Treasury would not/will not agree to a cut in CT.

One reason is that if NI received a special dispensation to cut it's rate of CT, Scotland, Wales and North East England would be up in arms if they are not also allowed a similar cut. The other major reason is that if the cut in CT for NI was enforced there would also be nothing to stop large companies based in London and other parts of Britain from relocating in Northern Ireland to avail of the lower rates and pay less taxes resulting in fundamental job losses in greater London and other parts of Britain as well as decimating the tax take from Corporation Tax for the UK exchequer.

Calls for a reduction in CT in the North demonstrate the weakness of the Northern Ireland economy. The reason for this weak economy boils down to simple economic policy. Economic policy of course is made up largely of fiscal policy. In NI fiscal policy is controlled by London. The UK government determines fiscal and economic policy on the basis of policy decisions which will maximise the tax take for the UK as a whole. Not surprisingly this is entirely based on what is in the best interests of the greater London and South East England region. The UK government can afford to charge high Corporation Tax in London as being one of the major cities of the world and a financial powerhouse companies need to have a base in London regardless of the taxes imposed. The UK government can also charge other high taxes such as airport passenger duty (APD) for similar reasons without affecting tourism or business in the greater London area.

While British economic policy may indeed maximise the tax revenues for the UK exchequer it has done nothing to prevent a basket case economy that has developed in the North with a public sector which employs almost a third of its total workforce, compared with 21 per cent across the UK and less than 20% in the Republic. By throwing thousands of poorly paid public sector jobs and a block grant of some £6 billion at Northern Ireland the UK government has largely succeeded in disguising the real state of the local economy in Northern Ireland. The truth is that NI will never reach its potential as part of the UK and will forever point the begging bowl towards London.

Of course there is an alternative, an alternative where economic and fiscal policy would be focused on what is in the best interests of the region, economic and fiscal policy which would allow Northern Ireland to reach its undoubted potential. The economic opportunities and strenghts of Northern Ireland are almost identical to that of the Republic of Ireland. In this context a United Ireland makes economic sense. An all Ireland economic policy would have huge benefits for the six north eastern counties of Ireland. CT of 12.5% would create between 58,000  and  90,000 private sector jobs in the medium term. The abolishment of APD and agressive marketing of Ireland as one country would see the north reach it's vast tourism potential creating thousands of additional jobs in this industry vital to Ireland's economy.

These are just two examples of how focused economic policy that would be brought about in a United Ireland would allow Northern Ireland to dramatically increase foreign direct investment, tourism numbers leading to mass job creation allowing NI to  rebalance the economy (in terms of reducing public sector jobs and creating private sector jobs) and create wealth. Economic policy of the Republic of Ireland implemented in Northern Ireland would allow the region to reach its undoubted vast potential which cannot happen so long as NI is subject to UK economic policy tailored to meet the best interests of South East England. .